Analysts lift Finders Resources on copper jump

The copper price has surged nearly 8 per cent in three weeks, and this combined with Tuesday’s takeover offer for PanAust which sent its shares soaring 35 per cent appears to have reignited interest in the sector. Shares in Australian copper producer Sandfire Resources increased from the previous day’s close of $5.60 to $6.02, representing a surge of 7.5 per cent.

Investors looking for a sleeper in the sector should examine
Finders Resources
, particularly given net profit of about $85 million from its first full year of near capacity production from the Indonesian-based Wetar project in Indonesia in 2015-16 isn’t too far short of the company’s total enterprise value of $103 million.

The Bankable Feasibility Study (BFS) indicates comparatively low cash costs of $1.05 per pound for the life of the mine, which is estimated to be in the vicinity of 10 years, but with significant likelihood of extension given exploration results and high grades.

Based on the BFS, the project will be producing at full capacity by the third quarter of 2015. Analysts at Canaccord are forecasting production of 26,600 tonnes in 2015-16, generating revenues of $193.7 million. The broker expects the company to deliver a net profit of $84.5 million in that period, representing earnings per share of 10¢.

This implies a price-earnings multiple of 1.7 relative to Tuesday’s closing price of 17.5¢, and a multiple of 3.5 based on Canaccord’s 12-month price target of 35¢. After the recent announcement of project funding the broker reiterated its buy recommendation and increased the price target from 31¢ to 35¢.

Finders started production at the Wetar project in March 2014, but construction of the new facility will enable the company to ramp up production from 3000 tonnes per annum to 28,000 tonnes per annum of copper cathode. As indicated by the near three-fold increase in ASX listed Tiger Resources’ share price when it progressed from a producer of copper concentrate to copper cathode, this product attracts a significantly superior valuation than copper concentrate.

The company has just secured development funding, including syndicated bank finance of $US165 million and $US45 million project level equity from Daewoo International Corporation. The banking syndicate includes the CBA, the Shanghai Banking Corporation (HSBC) and BNP Paribas.

The upshot of these developments will see Finders economic interest in the Wetar project reduced from 95 per cent to 72 per cent, but analysts view the overall developments in a positive light given the company will not have to raise equity. Consequently, it has triggered upward reratings.

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Daewoo’s involvement also provides a degree of certainty as it has entered into an offtake agreement covering 20 per cent of copper cathode production over the life of the project. This takes total committed production to 100 per cent with Standard Chartered and Tennant Metals each holding rights of 40 per cent regarding the balance of production

Analysts said the sale of a minority project interest was more than offset by the alleviation of any requirements for equity to be raised by Finders, which would subsequently have resulted in earnings per share dilution. Canaccord noted the attraction of a large South-East Asian trading group as a project partner, combined with the securing of high profile bank support, as a ‘major positive’ and testimony to Wetar’s attractive economics.